Worldwide: Sanctions And Trade Update: Russia And Ukraine

Summary: The United States, European
Union, and other nations have imposed targeted sanctions against a
variety of Russian and Ukrainian persons, as well as broader trade
restrictions, following recent events in Ukraine. Although the
measures remain relatively limited in scope, they create several
new compliance challenges for US and foreign firms. Further
sanctions and trade restrictions could follow in the near
future.

In response to recent events in Ukraine, the United States, the
European Union, Canada, Switzerland, and other nations have adopted
a series of targeted asset freezes and travel bans, which vary in
scope, as well as broader trade restrictions against Russia. The
sanctions have targeted several dozen former Ukrainian officials,
officials in the Ukrainian region of Crimea, senior Russian
officials, members of the Russian Government's inner circle,
and a Russian state-owned bank, Bank Rossiya. These measures create
a variety of new compliance challenges for US and foreign firms and
are likely to be followed by additional sanctions, unless there is
a de-escalation of political tensions in the region.

The US and EU have also imposed a series of broader trade
restrictions on Russia, including a freeze of EU-Russia trade talks
and a suspension of US licensing for exports and re-exports of
defense items and dual-use equipment by the US Departments of State
and Commerce, respectively. Negotiations on Russia's accession
to the Organization for Economic Cooperation and Development (OECD)
and the International Energy Agency (IEA) have also been suspended.
At the same time, Russia has retaliated with similar targeted
sanctions against a variety of US and other officials, and a series
of tit-for-tat measures could continue.

Compliance Challenges

The recently imposed sanctions represent the most severe
sanctions imposed against Russia since the dissolution of the
Soviet Union. Nonetheless, most transactions with Russian or
Ukrainian entities are unlikely to be affected. The measures do not
generally block trade with or investment in Russia, and most
Russian business enterprises will only be affected to the extent
that they are owned or controlled by sanctioned
individuals.1

These sanctions regulations create a variety of new compliance
challenges. Generally, the sanctions impose obligations on all
nationals, wherever located, of the respective sanctions-issuing
jurisdiction, as well as to all individuals and entities operating
or registered in that jurisdiction. The sanctions also prohibit a
wide range of transactions with the targeted persons and entities,
including, in certain situations, transactions involving intangible
assets (such as contracts) that can be used to obtain funds, goods
or services.

Firms operating in Russia, Ukraine, and the region more
generally, as well as those with significant client bases from the
affected countries, should review their records to determine
whether they have engaged in past dealings with sanctions targets,
either directly or through entities beneficially owned by them.
This should include firms that act as intermediaries for certain
transactions, including clearing banks. The regulations also
generally prohibit the facilitation of activities to evade
sanctions, which may include attempts to move or disguise assets or
develop legal arrangements, such as shell companies, to shield
assets from sanctions. Firms affected by the
sanctions—including those who may need time to wind down
activities with a sanctioned person—may in certain cases
apply for specific licenses with the appropriate regulatory
authorities.

With the US Congress prepared to finalize new Russia sanctions
legislation this week, further sanctions against Russia appear
likely. Further sanctions could include broader export
restrictions, the listing of more Russian state-owned enterprises
and oligarchs, a formal US and EU arms embargo, and potential
action against Russia at the World Trade Organization (WTO). The EU
has also reportedly drafted a list of 120 to 130 Russian
individuals who could be further designated in the future. In
short, the recent sanctions create a variety of new compliance
obligations for US and foreign firms operating in Russia and
throughout the region, and warrant close
monitoring.

US Sanctions Action

Executive Orders and OFAC
Designations

US President Barack Obama has issued three Executive Orders
(EOs) authorizing sanctions against certain Ukrainian and Russian
officials, and the US Department of the Treasury's Office of
Foreign Assets Control (OFAC) has imposed sanctions on several
dozen Ukrainian and Russian persons pursuant to these
orders.

On March 6, 2014, the President signed Executive Order 13660
authorizing sanctions against any persons responsible for actions
that undermine democratic processes or institutions in Ukraine or
that threaten the peace and security of Ukraine.2 It
further authorizes sanctions against individuals who are involved
in the misappropriation of Ukrainian state assets or have asserted
governmental authority over any part or region of Ukraine without
the authorization of the Government of Ukraine, as well as entities
"owned or controlled" by such persons.

On March 17, 2014, the President signed Executive Order 13661,
which expands the types of persons that could be sanctioned,
focusing on Russia's invasion and annexation of
Crimea.3 The expanded EO targets Russian officials
responsible for the invasion of Crimea, any individuals or entities
that operate in the arms or related sectors in Russia, and any
individual or entity that is "owned or controlled" by or
supports any such Russian official.

On March 20, 2014, the President signed Executive Order 13662,
which significantly expands the types of persons who may be
sanctioned, including oligarchs in various private industries and
other persons who materially support senior Russian
officials.4

In two sets of designations, OFAC has blocked the assets of
several dozen Ukrainian and Russian individuals and entities,
including Bank Rossiya, the seventeenth-largest bank in
Russia.5 Any assets of these persons in the United
States must be frozen, and no transaction with these persons may
involve a US person or occur within the United
States.6

US Financial Crimes Enforcement
Network

On March 6, 2014, the US Financial Crimes Enforcement Network
(FinCEN), a bureau of the US Department of the Treasury that
administers and enforces the anti-money laundering regulations
applicable to financial institutions, took the rare step of issuing
an advisory relating to asset freezes imposed by Canada and the EU
against 18 Ukrainian officials (described further below), even
though the US had not yet imposed similar sanctions. The FinCEN
advisory alerted US financial institutions to the risk that these
officials could seek to move their assets in a "deceptive
fashion," and reminded the financial sector of its obligation
to identify and report suspicious activity. By setting forth the
names and identifiers contained in the Canadian and EU
designations, FinCEN provided specific information to US financial
institutions to become part of their monitoring programs, although
of course no asset freeze was required until OFAC took action.

Suspension of ITAR and EAR
Licensing

The US Departments of Commerce and State have also announced a
suspension of licensing for exports and re-exports to Russia of
defense and dual-use items subject to the International Trafficking
in Arms Regulations (ITAR) and Export Administration Regulations
(EAR). Although these restrictions are "soft" sanctions,
they can often have more wide-ranging impact in that they are
country-wide (e.g., irrespective of transaction parties),
whereas OFAC sanctions are limited to specifically designated
persons. Certain EU Member States have imposed similar
restrictions.7

US Legislation

Meanwhile, the US Congress is prepared to finalize new
legislation this week that would formalize many of the sanctions
measures issued by Executive Order and also expand the scope by
including broader authorization for anti-corruption sanctions
against Russian officials.8 This legislation is likely
to lead to further OFAC designations of Russian persons in the near
future.

EU Sanctions Action

The EU has imposed a variety of economic and political sanctions
against the Russian Federation, including cancellation of the next
EU-Russia Summit.

EU Council Regulations

On March 6, 2014, the EU Council passed Regulation No. 208/2014,
which imposed a travel ban and asset freeze on 18 former Ukrainian
officials responsible for the misappropriation of Ukrainian state
funds and persons responsible for human rights violations in
Ukraine.9 Specifically, the Regulation provides that
"[n]o funds or economic resources shall be made available,
directly or indirectly, to or for the benefit" of the
sanctioned individuals.10 "Economic resources"
is broadly defined to include "assets of every kind, whether
tangible or intangible, movable or immovable, which are not funds,
but may be used to obtain funds, goods or
services."11 Under a broad interpretation, these
sanctions could prohibit the implementation of various types of
contracts with sanctioned persons. The Regulation also prohibits
activities meant to circumvent the sanctions.12 The
Regulation creates compliance obligations for all activities within
EU territory; nationals of all EU Member States, wherever located;
and to entities registered or incorporated within any EU Member
State.

On March 17, 2014, the EU approved a second Regulation No.
269/2014 imposing sanctions against 21 Russian and Ukrainian
persons responsible for actions which undermine or threaten the
territorial integrity, sovereignty and independence of
Ukraine.13 The list was not identical to the US lists
and did not directly target any private individuals or state-owned
enterprises, except to the extent that such enterprises may be
owned or controlled by sanctioned persons. The scope of application
was substantially similar to Council Regulation No. 208/2014.

On March 21, 2014, the EU approved a third regulation
sanctioning 12 additional Russian and Ukrainian
officials.14

EU Trade Actions

The EU and Ukraine will sign the political provisions of an
Association Agreement. The European Council has also affirmed that
the EU and its Member States are committed to signing the remainder
of the Association Agreement, which includes establishing a
"Deep and Comprehensive Free Trade Area" between the EU
and Ukraine. In addition, the EU will temporarily remove customs
duties on Ukrainian exports to the EU. Finally, the European
Council has requested the European Commission to examine Russian
actions in Crimea and propose new economic and trade
restrictions.

Future Sanctions

EU leaders have indicated that future sanctions measures in this
area are likely. Some reports indicate that a wide-ranging list of
120 to 130 Russian persons to be sanctioned has been prepared,
including the heads of Russian state enterprises. EU officials have
suggested that an arms embargo and more onerous trade-related
restrictions are also being considered.

Sanctions Designations in Other Jurisdictions

Other key jurisdictions, including Canada and Switzerland, have
issued similar, although not identical, travel bans and asset
freezes. In two recent orders issued on February 26, 2014 and March
7, 2014, Switzerland blocked the assets and economic resources
(including "contract fulfillment guarantees or other financial
commitments") of numerous Ukrainian individuals, requiring all
institutions holding or knowing of such persons' assets to
report them to Swiss authorities.15 Furthermore, on
March 5, 2014, Canada imposed asset freezes on the same 18
individuals against whom the EU initially imposed
sanctions,16 followed by a variety of additional asset
freezes against Ukrainian and Russian persons.17

Conclusion

Compared to other US and EU sanctions regimes, recent sanctions
imposed against Ukrainian and Russian individuals and entities
remain relatively limited, and most transactions are unlikely to be
affected. However, both the targeted nature of the sanctions and
the relatively complex business relationships among North American,
European and Russian firms create unique compliance challenges. It
is likely that the US and EU will continue to designate additional
Russian entities, including state-owned Russian enterprises and
oligarchs, in the weeks ahead. Accordingly, we recommend that US
and foreign firms take appropriate steps to ensure compliance with
these new sanctions measures and closely monitor developments over
the coming weeks and months.

Footnotes

1. The United States will continue to consider entities
"owned" by sanctioned individuals (e.g., if a
sanctioned individual or combination of individuals owns 50% or
more of the entity) to be automatically blocked, but determining
"control" for compliance purposes may be more
challenging. US officials have indicated that they may begin to
specifically designate entities they determine to be
"controlled" by the individuals sanctioned thus far to
assist with compliance.

6. The asset freezes apply to "[a]ll property and
interests in property that are in the United States, that hereafter
come within the United States, or that are or hereafter come within
the possession or control of any United States person (including
any foreign branch)" of the sanctioned persons, and those
assets "may not be transferred, paid, exported, withdrawn, or
otherwise dealt in." See Executive Order 13660,
Section 1(a). The sanctions also create compliance obligations for
any U.S. citizen, permanent resident alien, entity organized under
the laws of the United States or any jurisdiction within the United
States (including foreign branches), or any person in the United
States. Id. at Section 6(c).

7. See, e.g., United Kingdom Export
Control Organization, Notice to Exporters 2014/06: UK suspends
all licences and licence applications for export to Russian
military that could be used against Ukraine, Mar. 18,
2014.

On November 24, 2014, the US, UK, France, China, Russia and Germany (collectively the "P5 + 1") and Iran announced that they would extend to June 30, 2015 the validity of their "Joint Plan of Action" or JPOA.

The topic of FCPA compliance should be top-of-mind for U.S. auto industry companies who do business with third-party intermediaries and subsidiaries overseas, particularly in known "hot spots" such as China, India, Russia, Mexico, and Brazil.

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